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gokulsamudrala
Level 1

How to Expense Carriage House Rental

Hi

We have a carriage house that we rent out. 

It has its own Drive way. 

 

Water and sewage are separate accounts for the carriage house, so I am going to expense them, but How do I expense

- landscaping, snowplowing, tree work (esp given its separate driveway)

- what about property taxes, home owners insurance. 

It appears some blogs recommend prorating it based on square footage but I was not able to find an actual IRS guideline or article, so I just wanted to confirm. 

 

- depreciation : any drawbacks on claiming depreciation? does it affect the main house negatively if and when we were to sell it? 

 

4 Replies
Critter-3
Level 15

How to Expense Carriage House Rental

Read the IRS publication 527 to answer all your questions: https://www.irs.gov/forms-pubs/about-publication-527

Carl
Level 15

How to Expense Carriage House Rental

 

- landscaping, snowplowing, tree work (esp given its separate driveway)

Landscaping is a land improvement entered in the assets/depreciation section as a land improvement.

Snowplowing is a standard and common maintenance expense - but only that portion that applies directly to the rental.

Tree work I can't help with, since you don't provide more specifics on exactly what you mean by "tree work". Planting a tree? Removing a tree? Watering a tree? Trimming a tree? Regardless, what's it's impact/relationship to the rental?

 

- what about property taxes, home owners insurance.

 What about it? Is the unit and the property it sits on assessed property taxes separately from other property you own? (Such as your primary residence.) Does the house if it's own separate insurance policy?  If so, this isn't an issue as all property taxes and insurance costs are fully deductible.

Otherwise, if what you call a carraige house is what I would call a Mother-in-Law dwelling, you pro-rate property insurance and taxes based on the square footage of space that is exclusive to the renter.

 

- depreciation : any drawbacks on claiming depreciation? does it affect the main house negatively if and when we were to sell it?

I get the impression you think you have a choice on that. You are required by law to depreciate rental property. In the year you sell the property you are required to recapture that depreciation and pay taxes on it. If you don't take depreciation, then in the year you sell you are required to recapture the depreciation you should have taken, and pay taxes on it.  So while depreciation may help for the time it's classified as a rental, it's recapture in the year you sell the property does two things:  a) The recaptured depreciation adds to your AGI. b) the increased AGI may have the potential to bump you into the next higher tax bracket.

 

gokulsamudrala
Level 1

How to Expense Carriage House Rental

Thank you so much  @Carl 

Really appreciate your response 
the main house abd carriage house were on same purchase/deed/ loan 

 

- by tree work I mean we need to have trees cut down in the carriage house driveway. 

- do you recommend then consider as in law unit and prorate lawn , snow and other work ? 
- I only pay one insurance and taxes for the whole property. It is not itemized separately for carriage house and main house .. so I’ll just deduct this only as one item then?

- depreciation ; so how do I depreciate just the carriage house portion then ? Prorate it ? It doesn’t affect the main house then ?

 

Carl
Level 15

How to Expense Carriage House Rental

- by tree work I mean we need to have trees cut down in the carriage house driveway.

That's a one-time maintenance expense.

- do you recommend then consider as in law unit

The only difference I see here between what I call an in-law unit and what you call a carriage house, is the spelling.

and prorate lawn , snow and other work ?

Yes.

- I only pay one insurance and taxes for the whole property. It is not itemized separately for carriage house and main house ..

You may want to check with your insurance company on this. In some cases, insurance for your personal residence, to include any auxiliary dwelling units on the property, covers losses incurred during normal residence occupancy and use. It may not cover losses incurred while being used for other purposes, such as the business use of renting it out. I would suggest you check on that with your insurance company, and if they tell you that you're covered with your existing policy, *get* *that* *in* *writing*.

Now i myself don't have a situation like yours. But I have friends who do. What they had to do for their ADU was to purchase a physically separate insurance policy for the rental unit, since it was a physically separate structure from what was considered the "main residence" of the property owner. That's because their insurance covers what I guess you would call "ordinary, regular use and occupancy for the convenience and comfort of the insured" or something like that. So when renting out a separate unit on the same property, that unit is not being used for the "convenience and comfort" of the owner/insured. It's being used for business purposes, and a business is exactly what a rental property is.

 

so I’ll just deduct this only as one item then?

You'll deduct the prorated amount of the total. (stated that way just to clarify we're on the same page)

- depreciation ; so how do I depreciate just the carriage house portion then ? Prorate it ? It doesn’t affect the main house then ?

 

There's a number of ways, and you'll have to decide what works best for you. Here's one way based on a scenario I'm familiar with. Also, I'm picking number out of thin air to keep the math simple.

 

Owner purchased 5 lots in 2000 and built their primary residence overlapping/occupying the first two lots. Owner paid $10K per lot for a total of $50K for all 5 lots.

Cost to build house was $150K

Total cost basis in the property at this point is $200K.

In 2007 owner built an ADU (Accessory Dwelling Unit) on one of the three empty lots, for his mother to live out her days after his dad passed away. Cost of this 1BR/1BA structure was $75K. This unit was designed and built as a completely separate living structure with it's own bathing and cooking facilities, as well as it's own separately metered utilities.

In 2011 their mom passed away. Towards the end of that year (2011) they started renting it out.

 

On the 2011 taxes the ADU was treated and entered as a physically separate property all it's own. Since the ADU cost $75K to build and they chose to allocate two lots to the property, that meant the cost basis of the rental was $95K. So of that $95K, $20K is allocated to the land and the remaining $75K is allocated to the structure. Since land is not depreciated, that meant $75K was set up to be deprecated over the next 27.5 years with depreciation starting in the month the property was converted from personal use to a rental.

 

Now even though he received only one property tax bill, figuring how much of that bill to allocate to the rental was simple math. Here's how it works.

Cost to buy the 5 lots originally at $10K per lot:     $50,000

Cost to build the primary house:                             $150,000

Cost to build the ADU:                                                 $75,000

Total cost basis in the entire property:                   $275,000

Property Tax Bill:      $10,000

ADU/Land value is $95,000, which is 34.5% of the total value. Therefore $3,450 of the property tax bill is allocated to the rental. The remainder is a SCH A itemized deduction.

If one insurance policy does cover everything, then 34.5% of the insurance can be allocated to the rental.

 

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